WASHINGTON—Mixed data has painted a “muddled picture” of macroeconomic conditions in recent months, though a recession remains the “most likely outcome” of the rapid tightening of monetary policy and late-stage business cycle dynamics, according to the June 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
While inflation has moderated partly due to slowing domestic and global economic growth, the ESR Group said it believes continued robustness in the labor market risks an entrenchment of some core inflationary pressures.
“Lessons learned from the inflationary era of the 1970-80s, a time when price pressures eased and then quickly reaccelerated, lead the ESR Group to expect that the Fed will maintain its restrictive monetary policy stance until it is abundantly clear that inflation pressures from the labor market have eased,” the ESR Group said. “However, based on the timing of data releases, that evidence is unlikely to appear until a recession is already unavoidable, making the question of a downturn more a matter of when than if.”
Housing Market ‘Dynamics’
According to the new analysis, current housing market dynamics continue to be fueled by the lack of existing homes available for sale, a trend that did not improve during the spring homebuying season, when more homes are typically put on the market.
“This has supported a return to home price growth in recent months and continued to boost new home construction. While the ESR Group continues to expect housing starts to weaken in coming quarters, this is predicated on the business cycle turning,” the analysis states.
In the absence of a recession, the ESR Group noted substantial upside risk to its new home sales and starts forecasts.
‘Inflation Remains Sticky’
“Core inflation remains sticky, having not fallen as rapidly as other price measures, creating upside risk to the fed funds rate, as noted in the Federal Reserve's Summary of Economic Projections, and making it likely in our view that it maintains a restrictive posture for longer than most market participants initially anticipated,” said Doug Duncan, senior vice president and chief economist, Fannie Mae. “Meanwhile, housing prices continue to show stronger growth than what was previously expected given the suddenness and significant magnitude of mortgage rate increases.
“Housing's performance is a testimony to the strength of demographic-related demand in the face of Baby Boomers aging in place and Gen-Xers locking in historically low rates, both of which have helped keep housing supply at historically low levels,” Duncan continued. “Homebuilders continue to add to that supply, but years of meager homebuilding over the past business cycle means the imbalance will likely continue for some time. We do expect housing will be supportive of the overall economy as it exits the modest recession.”
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